The ROI in Enterprise Contract Talent Management

Human Capital Institute September 2009

In association with

The ROI in Enterprise Contract Talent Management

The ROI in Enterprise Contract Talent ManagementCopyright © 2009 Human Capital Institute. All rights reserved.

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Table of Contents

The Research ...............................................................................................................................1

Executive Summary .....................................................................................................................1

Introduction .................................................................................................................................3

The Importance of Contingent/Contract Workforce Management ...........................................5

The Challenge of Decentralized Contingent/Contract Talent Management .............................7

The Cost of Centralized Contract Talent Management .............................................................8

Sidebar — An Alternative View: Paying the Upfront Costs of Enterprise-Wide CWM........10

The ROI in Centralized CWM....................................................................................................11

Managed Service Provider (MSP) .............................................................................................14

Evaluating the Need for an MSP ...........................................................................................14

Sidebar — Vendor Neutrality in Contract Talent Management .......................................16

Vendor Management System (VMS) .........................................................................................18

Sidebar — Centralized CWM: A Tough Sell in the Healthcare Industry? .............................20

Sidebar — Should Your MSP Provider also Own Your VMS Technology? ............................22

Independent Contractor Engagement Specialists (ICES)

and Portable Employers of Record (PERs) ...............................................................................23

Sidebar — How Combined ICES/PER Services Work at Siemens ........................................24

Sidebar — An Expert View: Jeff Nugent, CEO of Contingent Workforce Solutions ...........27

Sidebar — Rockwell: A North American Strategy for CWM ................................................28

Measuring and Managing ROI in Contract Talent Management Programs .............................29

Conclusions ...............................................................................................................................30

Appendix A: Glossary of Key Acronyms ...................................................................................32

Appendix B: Survey Demographics ..........................................................................................33

Appendix C: About the Author ................................................................................................35

About HCI ..............................................................................................................................35


1

RiskMitigation

CWMProgram

CostSavings/Visibility

ProcessImprovement

StrategicManagement ofHuman Capital

The ResearchFrom May through August 2009, the Human Capital Institute (HCI) conducted extensive research, including a membership survey, interviews and an exhaustive review of secondary sources, to understand whether organizations are realizing a return on their investments in centralized contingent and contract talent management, and if so, how. Our key findings, which are sure to interest and even surprise many Human Resources professionals, are summarized and discussed throughout this paper.

Interested readers can find a Glossary of Terms in Appendix A and survey respondent demographics in Appendix B.

Executive SummaryThe findings from our research present an extremely compelling argument in favor of centralized Contingent Workforce Management (CWM). Rarely is an independent research

organization (such as HCI) able to make so clear cut a recommendation for or against a course of action. In this case, we strongly recommend that organizations move toward enterprise-wide, centrally managed and technology-enabled CWM. Below is a summary of the key ingredients for making the business case:

• Critical to any business case is the expectation of hard-dollar savings. In this case, an organization with a decentralized CWM process can expect to save between 7 percent and 12 percent on its current costs following a move to enterprise, centrally managed CWM — savings that are especially critical in today’s economy.

• The cost model for centralized CWM is also key in this economy. In more than 90 percent of organizations, the costs associated with implementing an enterprise CWM are minimal. There are few other opportunities for HR to help their organization save hundreds of thousands or even millions of dollars each year that require an upfront investment of less than $100,000.

Figure 1: The Benefits of Centralized Contract/Contingent Workforce Management

1 See: Definition of co-employment, businessdictionary.com/definition/coemployment.html

Source: Contingent Workforce Solutions


2

If the hard-dollar Return on Investment (ROI) isn’t enough, the business case also includes the following intangible benefits:

• Organizations should be concerned with compliance risk. Co-employment, which occurs when two employers both have an employer-employee relationship with the same person1, is a real risk. Several organizations have been sanctioned for co-employment violations, some of which have led to high-profile cases. Organizations in violation of co-employment rules may be liable for back taxes, benefits and bonuses owed, as well as fines. Central, enterprise-managed CWM reduces this risk.

• Time savings should also be noted. Our survey respondents and interviewees discussed shorter hiring cycles, re-use of requisitions, more efficient and effective on-boarding and reductions in contractor time to performance.

• Nearly every interviewee spoke about the importance of reporting. One went as far as to say that this was the single greatest ROI his organization realized in moving from decentralized to centralized CWM. Better data leads to better reports, on which to make better decisions.

Finally, our respondents and interviewees consistently pointed to the simple fact that with centralized CWM, they know how many contractors they have, how long they’ve been there and when to off-board them. This may appear to be basic, but it can be difficult to track contractors in a decentralized CWM program, especially in larger organizations.

Of course, as in any other large change management program, the business case will be enhanced with an executive sponsor and general leadership buy-in. Most advised that the business case should reference exactly where and how it furthers the overall corporate business plan.


3

The composition of the American workforce is steadily changing. Today, a non-traditional category of workers popularly known as the “contingent workforce” is gradually becoming almost as large as the traditional workforce. Almost one-third of the American workforce today is comprised of contingent workers and contracted talent. These are often referred to as independent contractors, temporary workers, freelancers, interim executives or part-time workers.

In just 20 years, the percentage of work allocated to contingent labor has grown from 6 percent (in 1989) to more than 27 percent in 2009.2 Already, large organizations typically spend an average of about 7 percent of overall company revenue on contingent and contract labor3, often representing tens of millions of dollars. In an April 2009 report by Littler Mendelson (a pre-eminent U.S. employment law firm), 73 percent of companies with 1,000 or more employees said they would grow their contingent workforce by a median of 25 percent between late 2008 and late 2010.4

-100% to -50%

19%

-49% to -1%

15%

1% to 49% 39%

50% to 100%

17%

100%+

10%

0% 10% 20% 30% 40%

Figure 2: Projected Growth of Contingent Workforce

Source: Littler Mendelson

Introduction

2 “Managing Contingent Labor Strategically” by Dr. John Sullivan and Master Burnett.3 “The Current State of the Contingent Workforce,” MBO Partners and Human Capital Institute, June 20, 2006.4 “ The Emerging New Workforce: Employment and Labor Law Solutions for Contract Workers, Temporaries, and Flex-Workers.”

Littler Mendelson, April 2009.


4

The same report also demonstrates the fast increase in contingent workforce spend over the 13-year period between 1995 and 2008 (Figure 3). In contrast, payroll employment increased by less than 4 percent in the period between January 1999 and June 2009.5

Thus, the contingent/contract workforce has become extremely important by size and cost

and is becoming more so. The purpose of this report is to examine what organizations are doing to manage their growing outsourced workforce (contractors, contingent workers, and so on) and what tangible and intangible returns they are realizing. It also provides practical advice in building a strong business case for centralized and contingent/contract workforce management.

5 See: Bureau of Labor Statistics, Databases and Tables. www.bls.gov.

Temporary spend has more than doubled since 1995

Tem

po

rary

Sta

ffin

g S

pen

d ($

bill

ion)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

40

50

60

70

80

90

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Figure 3: Rapid Growth in Contingent/Contract Talent Spend

Source: Littler Mendelson


5

0% 5%

10% 15% 20% 25% 30% 35% 40%

38% 36%

4%

19%

3%

Figure 4: Why do Organizations Use Contingent/Contract Workers?

Source: Aberdeen, 2009

Perc

enta

ge

Res

po

nden

ts

Feedback of Respondents

There is a great deal of variance in how the broader contingent workforce is defined, and while we use the terms “contingent” and “contract” interchangeably in this paper, there is a difference.

The contingent workforce can be defined as the entire group of non-traditional workers that comprise the 25 percent to 30 percent of the overall U.S. workforce referred to above. It includes contractors and “temps,” as well as those outside individuals or other organizations that do any work at all for the organization.

Contract workers are a subset of the broader group. They represent the fastest-growing seg-ment of the contingent workforce and already account for more than half of all contingent workers. They are the skilled workers, man-agers and executives that contribute to and

often lead projects in organizations worldwide. Contract workers are often key contributors assigned to “mission critical” tasks.

It is our contention that, owing to the importance of contract talent, HR and Talent Management leaders must take responsibility for at least this segment of the broader contingent workforce.

Today, in the midst of the worst recession since the Great Depression, even more organizations understand and are embracing the flexibility a large contingent workforce offers and the reduction of fixed costs that accompanies contractors versus regular employees. Figure 4 shows that for the great majority (75 percent) of organizations, contract talent management is seen as strategic — in that it can enhance competitiveness and profitability.

The Importance of Contingent/Contract Workforce Management

“I believe it is the best practice for HR to lead and Procurement to support [contract talent management]. We have hundreds of contractors who are performing very high-end work — nuclear professionals, engineers and project managers — on well-defined projects. These are very important people ...”

Paul Seiler, Sourcing Manager, Solar & NextEra Transmission Construction

My organization views the strategic utilization of contract talent as a way to enhance its competitiveness and profitability.


6

Practically every workforce pundit in America foresees even greater and faster growth in the contract and contingent workforce as a result of the recession of 2008-2009. Contingent and con-tract talent is especially important today because, more often than not, skilled workers in core posi-tions make up this workforce. Gone are the days when “contingent worker” was another name for a “temp.” The largest part of the contingent workforce today, and the fastest growing, is the high-end, skilled and managerial component.6

Whatever the composition of the contract workforce, cost savings can be achieved in the majority of mid-size and large organizations. Those that manage their overall “spend” on the contingent workforce carefully, with the aid of expert services and technologies, can realize significant hard-dollar savings, better efficiencies, time savings, less regulatory risk and more effective deployment of their workforce.

6 See: “The State of Contract Talent Management and the Role of HR,” Human Capital Institute, January 2009


7

It is telling that most of those we interviewed started the ROI discussion along the lines of the quotes above. They wanted to point out the costs of a decentralized approach before discussing the costs of managing contract talent centrally and enterprise-wide.

Indeed, any discussion of ROI must start with an understanding of what existed before the initiative was begun to improve the process. We learned in almost every case that large organizations, which had not made contingent/contract workforce management (CWM) an enterprise-wide, centrally administered and managed program, could not determine their number of contractors, the tenure of those contractors, their skill sets, their total pay, nor the risks involved in engaging them.

Worse, in this environment, it is normal for staffing vendors to work directly with hiring man-agers. This invariably leads to wildly different pay rates for contractors with similar skills. In short, organizations with decentralized, hiring man-ager-led CWM programs suffer reduced visibility, increased risk and higher-than-necessary costs.

Beyond hard costs, many of our respondents pointed to inefficiencies, such as those lead-ing to long hiring cycles. Others cited flaws in

on-boarding, time and attendance records, pay records and contractor tenure management. In a few cases, survey respondents and interviewees were most concerned about co-employment risk7, particularly when they felt they had insufficient vis-ibility into their contingent/contract workforce.

Clearly, it is very difficult, if not impossible, for large organizations with significant CWM spend to control the process and costs well in a decentralized program. For that reason, organizations are increasingly turning to solutions and services to help manage the contingent/contract workforce at the enterprise level. Technologies like Vendor Management Systems (VMS) and services such as those offered by Managed Service Providers (MSP) and Independent Contractor Engagement Specialists (ICES) or Portable Employers of Record (PERS) are increasingly common in large organizations because they can reduce the costs of CWM quickly and dramatically, they can reduce risk, and they can improve visibility and efficiencies.* (Please see the glossary in Appendix A for definitions of the above).

This leads us to costs. If enterprise contingent/contract talent programs are valuable, what is the cost of moving an organization from a decentral-ized process to a centralized one?

The Challenge of Decentralized Contingent/Contract Talent Management

“We were decentralized. Hiring Managers and individual business units were in control, mark-ups fluctuated wildly among dozens of suppliers.”

“The hiring managers were so frustrated before. It was two to three weeks to get a requisition out the door. The day we went live, it was a Monday and we had our first requisition approved and on the street within two hours.”

“ ... the processes were pretty significantly broken — our ability to identify requirements, get those to suppliers, selection and on-boarding — the whole process was broken.”

From expert interviews conducted for this research

7 Co-employment: Co-employment may occur when two or more employers have actual, or potential, legal rights and duties with respect to the same employee or group of employees. For example: when an organization enters into an agreement with a staff-ing service to provide temporary workers, the organization can potentially become a co-employer. Generally, the more control an organization exercises over its temporaries (contractors, etc.) the greater the co-employment risk. (The foregoing is a summary from “Straight Talk on Co-Employment,” which can be found here: http://templates.haleymail.com/content/1087411202.pdf


8

Our survey respondents and interviewees were asked what kinds of investments they were required to make in implementing centralized, enterprise-wide CWM technologies and services.

Seventy-two percent, 71 percent and 68 percent of survey respondents cited the “upfront cost of the implementation,” “ongoing transaction costs” and the “internal cost to manage the program” respectively, as shown in Figure 5. To newcomers, it might seem odd that the costs of licensing software and paying service provid-ers are absent. As discussed below, the CWM industry has evolved a unique method for paying for software and services that, in many cases, relieves the “buyer” of these burdens.

It is important to note, however, that the “upfront costs of implementation” may some-times include software licensing costs and/or services consulting fees and retainers, depend-ing mainly on buyer preferences (see sidebar). In most cases, however, it involves neither. The most common financial model for Vendor Management Solutions (VMS) and for Managed Service Providers (MSP) is the “Supplier-Funded” model. According to the experts interviewed for

this research, more than 90 percent of organiza-tions choose this model.

Organizations that opt for the supplier-funded model do not pay for the technology or services they receive, at least not directly. Rather, the technology provider (VMS) and the service pro-vider (MSP) collect their fees by taking a small percentage of the overall “spend-through” on contingent labor. In other words, if an organiza-tion spends $50 million per year on contingent and contract staff, the MSP and VMS might share something between 2 percent and 4 percent of that total, depending on the type of spend. If the contract workers are at the higher end — project managers and engineers, for example — the percentage tends to be in the lower end of that range. If the workers are light industrial or administrative “temps,” the percentage is likely to be in the higher end of the range because greater hiring volumes can be expected due to higher turnover.

In the supplier-funded model, the ongoing costs of the program are passed on to staffing providers rather than coming from the client organization. But it is important to realize

The Cost of Centralized Contract Talent Management

“We needed to invest some work upfront with staff to make sure that we had executive team buy-in and to make sure that we had at least the understanding from the heavier users of contingent workers for our reasons for moving in this direction. So there was a fair amount of staff time to both sell it from the top-down and also to get some grass-root support from key business users. We did that in combination with a firm in the market who, in an effort to sell us on the industry and also expose us to their firm’s capability, helped us through a needs assessment at no or very low cost. That set the stage for us.”

“During the implementation, we opted for a supplier-funded model. The cost of implementation was borne by the MSP that we selected.”

Survey Respondents


9

0% 20% 40% 60% 80%

I don't know

Other

The internal cost to manage the program

The ongoing transaction costs

The upfront cost of the implementation

4%

8%

68%

72%

72%

Figure 5: What Do You Consider Your Investment to Be (in Calculating Return on Investment—ROI)?

n=206 Source: Human Capital Institute, 2009

that this doesn’t make the program free. By passing the costs on to staffing suppliers, those providers are almost certain to factor the “tax” into their negotiated margins. Margins are still likely to be lower than what most organizations are paying in a decentralized model, but perhaps not as low as could be negotiated in a “client-funded” model (where organizations pay directly for their VMS software and MSP services and do not pass the costs on to staffing vendors). Ultimately, the great majority of organizations choose the supplier-funded model because it is easier to “sell” internally and is predictable: Buyers know the percentage the MSP/VMS is taking and they know that fees fluctuate with volume. In a client-funded model, there are fewer guarantees, in that organizations can’t be certain how much lower the negotiated margins will be, and depending on the client-funded model, they may be locked into a fee even when hiring volumes go down.

In the supplier-funded model then, upfront costs are most often limited to implementation fees (to the MSP/VMS) and the costs of training and orientation for the new, centralized way of managing contingent and contract talent, and all associated change management expenses. Organizations can expect to pay their MSP and VMS providers about $20,000 at the low

end and about $100,000 at the high end for implementation fees. This includes their expenses in setting up the centralized program, plus the costs of technology integration, data transfer and any customization work. The more points of integration or customization, and in general, the bigger the CWM program, the more an organization can expect to pay for implementation costs.

Carolyn Pissel, Global Technology Procurement Manager for Jippenson, warns that the implementation process can be long and involved.

“There was a lot of change management. We set up a stakeholder team made up of our CFO, CIO and VP HR, who were the key people we needed to support this. We aligned the goals of the project with the main goals of the organization. This was important to build the consensus. Had we not, I doubt we would have been successful.

“We could have purchased our solutions and hosted them in a do-it-yourself model. Instead, we went with a fully hosted and fully supported model with a CAM (customer account manager) on site, and that has been hugely successful. We have one CAM on site, but we don’t pay for him directly. We’re on a flow-through percentage


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An Alternative View: Paying the Upfront Costs of Enterprise-Wide CWM

According to Patrick Murzyn, Managing Director of Knomics (a CWM consulting firm), it’s about doing the math. Speaking about a multinational firm he worked with recently to centralize their CWM, Murzyn says:

“After doing our ROI calculations, we decided to pay a capital upfront investment. If you look at the tax rate versus the license costs, you can make the right decision. Let’s say they (MSP/VMS) agreed to take a low, one-half percent on a big spend through, say $100 million. So it would be $500,000 to cover the software and operating costs. That is not a huge cost; it’s not bad, $500,000.

“But they are more likely to charge 1 to 3 percent, or more. So the costs are much higher. At that point, I can tell you it’s better to buy the software from the VMS and pay their maintenance and data center fees plus implementation costs. And, even with the MSP management fee on top of that, you’re further ahead.”

Says Murzyn, “In the supplier-funded model, all the cash flows from the company that pays anyway, so it really isn’t the staffing provider who pays. The tax works because it is applied across the board and is charged to the invoice. In that way it is a hidden tax, and it only feels like you’re not paying.”

model (supplier-funded) that they get paid from. If they have more cost and spend-through involved, they get a higher amount based on a percentage. This is passed on to the supplier and dealt with on that side.

“Initially, this fee model was a small issue with the suppliers, but we did a thorough, seven-week implementation, in which we offered constant communications and training, not only to our hiring managers but also for our staffing suppliers. We also ran a supplier summit so the suppliers could come together and express their

concerns. We addressed their questions, and some struggled with it, but after six months or so most believe it is a good solution for them, too.”

In addition to the upfront costs of implementing an enterprise CWM program (with services and technology), organizations should calculate the ongoing costs, including any transaction costs and the internal costs of managing the program centrally. In most cases, organizations also bear the costs of providing office space for the staff from their MSP and providing at least some of their equipment.

“We went with a supplier-funded model. We’ve got an on-site project management office staffed by professionals from the MSP, so we make that space available — office equipment, computers and that sort of thing, but it’s minimal in the grand scheme of things. If you were evaluating, you would not want to ignore that there is some ongoing facility cost and technology cost to have this type of program in place. That said, the only significant costs we’ve incurred are in the investment of time.”

Survey Respondent


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The ROI in Centralized CWM

“We were able to reduce the number and types of staffing companies that supplied us. Now we have primary and secondary suppliers (tier one and two). We are able to leverage our MSP to benchmark rates within our area, the type of jobs we deal with, for example. So we are able to baseline what those rates are and then by doing that we are able to reduce our rates by a considerable amount because now we have a really competitive benchmark in what those rates should be. We were also able to implement a rebate system based on volume, so we realize further savings on margins when the amount of spend a particular supplier enjoys passes a certain threshold. Overall, we’ve been able to reduce rates by 18 percent by putting these things in place.”

Director of IT Management, Retail Industry

Now that the motivators and necessary investments for centralized CWM are understood, we can focus on the return on that investment, or ROI. More than half our survey respondents reported ROI in three key areas: “reduction in overall spend,” “increased output versus full time resources” and “reduction in administrative time and cost” as shown in Figure 6.

When talking about ROI in terms of reduction in overall spending and administrative time and cost, Kerry Etheridge, Senior Manager of Strategic and Sustainable Sourcing at the

University of Southern California, says, “USC chose to go with a vendor-neutral MSP that had developed its own proprietary VMS. Prior to establishing a centralized (CWM) program, we had a pool of more than 30 temporary agen-cies, all using different mark-up rates. With the resources available to us, there was simply no way for us to monitor and standardize that many contracts. Not only has the centralized program saved us money and time, but it has also relieved us of worrying about certain co-employment issues such as tracking the number of hours worked by each temp.”8

0% 10% 20% 30% 40% 50% 60% 70%

I don't know

Other

Reduction in administrative time and cost

Increase output versus full-time resources

Reduction in rates

Reduction in capacity

Reduction in overall spend

3%

5%

53%

66%

29%

16%

62%

Figure 6: What Do You Consider Your Return to Be (in Calculating ROI)?

Source: Human Capital Institute, 2009

8 HCI Webcast: Building a Business Case for Contract Talent Management.


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Indeed, in our survey, interviews and secondary research for this paper, we discovered tremendous ROI potential for centralized CWM that goes beyond lowering costs. Our survey group cited an emphasis on hard-dollar savings and reduced costs as the most important ROI, but also placed great importance on time savings, risk reduction and other “soft” returns. Somewhat surprisingly, fewer looked to decreased dependence on contract talent as a sought-after outcome (Figure 7).

So what are the hard and soft returns realized by organizations that move from a mostly decentralized CWM process to a centralized, enterprise model?

First and foremost ROI comes in the form of cost savings through the negotiation of better rates from staffing suppliers. In our survey, only 8 per-cent of respondents who track their ROI claimed that they had realized no savings from their MSP, VMS or ICES/PER initiatives. On average, 62 percent reported overall savings of 7 percent or greater and almost a full quarter reported sav-ings of greater than 15 percent. On the soft side, survey respondents and interviewees reported savings in time, dramatically better efficiencies, lower risk of compliance violations and greater visibility and reporting around CWM.

Thus, if an organization runs a decentralized CWM program and spends $50 million per year on contingent/contract talent, it can calculate an ROI target fairly easily, if somewhat roughly. Supposing the organization anticipates a 7 percent reduction in the cost of its contract talent, it can expect savings in the first year of $3.5 million. If the same organization expects to spend $50,000 in implementation fees and another $100,000 in estimated change management and training costs, its hard-dollar ROI in year one can be estimated at $3,350,000.

In the next three sections, we look at the ROI in each of three key components to a centralized CWM program. Figure 8 illustrates current practice in the majority of organizations. The decentralized model depicted is characterized by the independent actions of hiring managers working directly with any number of staffing providers. In most cases, there is very little central coordination of rates (such that hourly fees paid for the same skill set vary widely). Moreover, there may be challenges in contractor time and tenure tracking, regulatory compliance and reporting. Figure 9 represents enterprise-wide, centrally managed CWM using technology and service providers.

Figure 7: How Does Your Organization Factor the Following when Determining ROI for Human Capital-Related Programs?

Hard-dollar savings

Cost avoidance (elimination of future cost)

Soft-dollar (activity-based cost) savings

Demand management (process-based reduction in usage)

Other

88%

85%

77%

65%

94%2%

12%

20%3%

13%

6%

4%0%

5%3%4%

4%2%

9%

4%

25% 50% 75%

n=206

Very Important

Neutral

Unimportant & Irrelevant

Unable to Rate



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HM

HM

HM

HM

HM

HM

HM

HM

• Requisition A

• Requisition B

• Requisition C

• Requisition D

• Requisition E

• Requisition F

• Requisition G

• Requisition H

Figure 8: Traditional, Decentralized CWM (i.e., for a Java Programmer position)

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

$70

$120

$94

$79

$85

$110

$95

$115

$100

$120

$75

????

On-boarding?

Time & Expense?

Tenure Tracking?

Reporting?

Compliance?

Performance?

HM

HM

HM

HM

HM

HM

HM

• Requisition A

• Requisition B

• Requisition C

• Requisition D

• Requisition E

• Requisition F

• Requisition H

• Requisition I

HMs HMs MSP

MSP

TierOne

Vendors

TierTwo

Vendors

VMS

VMS

RateValidation

RequisitionBank

Independent Contractor ICES/PER(Direct Sourced)

Figure 9: Central, Managed CWM (i.e., for a Java Programmer Position)

In a centrally managed CWM program, as depicted in Figure 9 above, Hiring Managers identify their needs and use the VMS to select the appropriate requisition. The MSP validates the requisition, assigns a pay rate or range from the negotiated rate card and distributes the req-uisition in a manner designed to attract the best talent at the lowest cost. The requisition may go to tier one vendors first, or to vendors from both

levels simultaneously (or to only a few specialized vendors if the skills sought are unique). In some cases, vendors compete for the opportunity to place their candidates at rates even lower than the posted range offered. The vendors submit their candidates to the VMS where hiring man-agers can review them. Finalists are chosen, interviewed and hired by hiring managers with the aid and administrative services of the MSP.


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Managed Service Provider (MSP)

9 “What is an MSP? The Role of Managed Service Providers in Contingent Workforce Management,” whitepaper, Human Capital Institute.

0% 20% 40% 60% 80%

Unsure

No

Yes

6%

68%

26%

Figure 10: Does Your Organization Use a Managed Service Provider (MSP) Partner to Help Manage the Contract/Contingent Workforce?


A great deal of support services and knowledge are required to manage a large contract talent workforce. In order to reduce costs and ensure standards in quality, time and compliance, many organizations outsource day-to-day manage-ment of CWM to Managed Service Providers.

An MSP (Managed Service Provider) is an out-sourced service provider who is responsible for procuring and managing contingent workforce needs according to client requirements. MSPs may or may not offer a Vendor Management System (VMS) of their own but they normally combine a VMS technology offering into the programs they run for clients.

How does an MSP help its client save money? Due to the fact that a typical MSP has several clients or even several dozen clients, they might control billions of dollars in contingent workforce spend (aggregated across all of their clients). This being the case, they naturally have great leverage and influence with staffing sup-pliers. Moreover, MSPs are domain experts and should have knowledge of local, national and

international market rates for a wide variety of skill sets. In most cases, these factors ensure their ability to negotiate better markup rates with suppliers than all but the very largest organizations.

Evaluating the Need for an MSP The significance an organization gives to the contingent workforce is directly linked with the determination of whether or not an MSP is beneficial. The experts we interviewed suggested several questions to ask:9

• What percentage of the total workforce is contingent and how does this vary over the course of a year or product cycle?

• How important is the contingent workforce to strategic business goals?

• What internal resources can be devoted to the eight processes (requisition, recruit, screen, engage, on-board, manage, invoice, and off-board) that are part of managing a contingent workforce?


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• Are many providers already being used? Are similar services being delivered from them at different price points?

• Is it difficult to reconcile overall spend?

• Is appropriate visibility of the contingent workforce available and is their usage in compliance with policies, regulations and best practices?

For any organization spending roughly $8 million or more per year on its contingent or contract workforce, centralized CWM might make sense. Below that, it may be difficult to justify an enterprise program with an MSP and it may be difficult to find a willing MSP, especially if a supplier-funded model is intended. Organizations with smaller spends

often partner with a “primary vendor,” normally a large staffing supplier, who both fulfills requisitions and acts as a “vendor-aligned” MSP. Alternatively, many organizations manage their own enterprise CWM programs without the assistance of an MSP. Indeed, the great majority of our respondents don’t have an MSP partner for CWM (Figure 10).

The decision not to use an MSP may be a deliberate one (most companies in the United States earn annual revenue of less than $10 million) or, for larger organizations, a lack of awareness. Either way, of those organizations that utilize an MSP, more than half (52 percent) report savings of at least 7 percent and one in five have experienced savings of greater than 15 percent (Figure 11).

0% 10% 20% 30% 40% 50% 60%

We have experienced savings greater than 25% in spending on the contract talent workforce due to our MSP

We have experienced savings of between 21–25% in spending on the contract talent workforce due to our MSP

We have experienced savings of between 16–20% in spendingon the contract talent workforce due to our MSP





We have not experienced savings from our use of an MSP service

Unsure

1%

1%

7%

3%

14%

9%

6%

10%

49%

Figure 11: If You Use an MSP, Please Estimate the Financial Returns Your Organization Has Experienced to Date.

n=70



16

When asked to describe the non-financial returns on investment their organization has experienced through use of an MSP partner, survey respondents were likely to answer along the following lines:

“There is greater adherence to the approval process to obtain contract labor, a better security process and a consolidated on-boarding experi-ence provided by the MSP so that contractors come into the organization with information about us that allows them to be more productive in a shorter time.”

“Enterprise reporting and administration is greatly enhanced. Worker misclassification is reduced.”

“They manage the day-to-day, ensuring fast placement of employees as needed. We do not have to deal with performance management issues and training needs beyond the minimum required for the role.”

“ It gives us one place to manage all staffing partners — which saves time and effort — but does not seem to stop cold calls, random inquiries, etc.”

Vendor Neutrality in Contract Talent Management

The contingent/contract workforce management field is a crowded space. There are tens of thousands of staffing suppliers, ranging from one-person firms to multinationals with thousands of employees. There are dozens of VMS technology providers and perhaps as many MSPs, as well as hundreds of Payroll Services, dozens of Independent Contractor Engagement Specialists (ICES) and a handful of Portable Employers of Record (PERs).

Some large staffing firms are also the owners of VMS technologies and/or MSP and Payroll services. A question of “neutrality” arises in these cases.

“Vendor-neutral” VMS and MSP providers are those that have no ownership affiliations with staffing organizations whatsoever, or those that act as though they have no such ties. Theoretically, these providers are better able to ensure a level playing field for all staffing suppliers that participate in a clients CWM program.

Can a staffing firm that owns a VMS or also operates as an MSP be completely objective when it helps a client fill its requisitions? Might such an arrangement tempt a firm to favor its own (often parent) staffing firm over others when filling requisitions? On the face of it, VMS/MSP clients and their other staffing suppliers are justified in their concern over these questions.

To address these issues, some staffing providers who own VMS and/or MSP have created separate companies to run them. This effort to overcome the perception that they cannot be neutral has had mixed success. Some of their clients have required specific clauses in their VMS/MSP contracts to exclude the use of the parent company’s staffing services altogether.

Clearly, there is no perfect resolution to the question of vendor neutrality. Organizations that exclude VMS/MSPs from consideration because of their affiliations with staffing suppliers may be excluding a provider that is the best match for their needs. Those that choose the VMS/MSP but insert a ban on using the parent staffing supplier may be harming themselves in terms of contractor cost and quality, especially when the parent is a large provider. This is a debate that is bound to rage on for years.


17

These responses clearly illustrate the less tangible advantages of having an MSP to manage contract labor. However, as illustrated in the last quote, an MSP cannot solve every problem. In some cases, even after an organization works with an MSP to centralize CWM, “maverick” activities take place. These activities might include hiring managers that do not comply with a rule to put all contingent/contract hiring through the MSP and VMS. Where this occurs, the effectiveness

of centralization is diminished. Some staffing suppliers will exploit any back door that remains open to a hiring manager and will call, for example, until they are satisfied that there is only one method to work with their client (see sidebar, “Centralized CWM: A Tougher Sell in the Healthcare Industry?”). MSPs are incentivized to help their clients reduce and eliminate “maverick spending.” Even so, it might take months or years to accomplish full, enterprise-wide compliance.


18

Vendor Management System (VMS)

RequirementDefinition

Time & Expense Tracking

Document Management

& On-boarding

Invoice & PaymentTracking

Quality Management

CandidateScreening &

Selection

Submittal ofCandidates

Worker Off-boarding

Reporting & Analytics

Front End — Recruitment

Back End — Administration

Distribution to Suppliers


Figure 12: How VMS Works

A Vendor Management System (VMS) is an Internet-based software application that is used as a mechanism for the acquisition and management of temporary or contract/contingent labor, and sometimes, permanent staff as well. It refers to a technology that facilitates the requisitioning and procuring of mainly temporary staff, as well as the management of time and attendance and the production of reports. The essential features of a vendor management system are business

intelligence and advanced workflow tools, such as order/requisition distribution, consolidated billing and advanced reporting capability. Because VMS tools have been designed specifically with the contingent/contract workforce in mind, they represent an improvement on the more traditional contingent workforce management approaches such as paper-based models, spreadsheets and Enterprise Resource Fulfillment (ERP) or Human Resource Information System (HRIS)-driven systems.


19

One quarter of our survey respondents report that they are currently using a VMS (Figure 13). Of those that employ a VMS, our respondents are almost equally split between using the technology directly and using it through a third party, such as an MSP or a staffing supplier (Figure 14).

Though the majority of our survey respondents (67 percent) do not use VMS technology as an aid to manage their contract labor workforce, those that do appear to be split between using it independently of an MSP and in combination with an MSP (Figure 12). Most of our interviewees, on the other hand, are convinced

of the advantages of combining both.

Verdis Baldridge, who is in the IT Strategy and Business Planning and Global Corporate Systems Group at The Gap, says, “At The Gap, we decided about two years ago to go with a VMS and have a vendor-neutral MSP... by having the VMS, we are able to structure it in a way that we can control our spend and also control our suppliers in terms of the type of resources and skills that we actually need. With our MSP, we are also able to keep a pulse on what’s out there in the industry as markets go up and down; we are able to adjust to that.”

0% 10% 20% 30% 40% 50% 60% 70%

Unsure

No

Yes

8%

67%

25%

Figure 13: Does your Organization Use a Vendor Management System (VMS) Technology to Aid in Managing the Contract/Contingent Workforce?


49%

9%

42% Purchased or licensed a VMS Internally developed our own VMS VMS offered by our primary staffing vendor

Figure 14: VMS Access

Source: Staffing Industry Analysts, Inc., 2009


20

Centralized CWM: A Tough Sell in the Healthcare Industry?

By the time Scott Doak, Executive Director of Talent for MD Anderson Cancer Center, joined the organization, it was already using an MSP and VMS to help manage its contingent workforce. The problem? No one was mandated to use it and so, according to Doak, “the benefits are hard to qualify, people are sporadically using it, hiring managers are calling staffing suppliers directly and holding on to prior relationships.”

To date, MD Anderson has been unwilling to mandate a one-shop contract talent management model. In part, it is due to the influence of the hiring managers, who happen to be physicians in many cases. Historically, the organization has been reluctant to interfere with section heads (doctors). “I doubt we’re unique in that” says Doak. “It’s a real complex bugaboo when you have physicians running departments. It’s hard to encroach on them.”

Nonetheless, Doak, his team and his MSP partner have made progress toward centralizing more and more of MD Anderson’s contract talent spend. “Perhaps not on the clinical side,” according to Doak, “but certainly in Allied Health and anything non-clinical.” Doak takes a mostly positive view. “We assume that if the whole organization used the MSP and VMS, it would save time and money, and we would have good data and reporting. I’m not frustrated though because there’s an opportunity here. We perceive a benefit, but we can’t say it’s a fact or quantify it yet. Right now we have managers who can go through the MSP/VMS to bring someone on and take advantage of the cost savings, but if the vendor knows a manager can circumvent it, why would he go along with the third party solution? So we have to fix that.”

Doak’s frustrations are tempered by the cold reality of his position as a talent management professional in a life-or-death business. He says,“… this is a 24/7/365 operation and people need help when they need it, so [HR/TM] can’t slow it down. It’s not that the managers are opposed to it, but there are vendors that want that direct relationship and don’t want to go through the third party. They are highly specialized and are in a position to never have to agree with the centralized approach because they have a lot of power. They are supplying hard-to-find people, and they know they have leverage. They might just walk away. There’s a lot of competition for specialized nurses, physicians and technologists.”

Doak continues the struggle, but as a veteran talent management professional in the healthcare industry, he is realistic. “Even with my last employer, the biggest healthcare organization in the country, it’s a challenge,” Doak says. “They built their own CWM system and technology. They tailored it exactly to their needs, and they had big leverage with vendors due to their size. Still, it took years to get all the vendors on board. Now it’s pretty unified but not for all jobs. The best thing is that

they have central data and reporting.”


21

Figure 15(a): If Applicable, Please Estimate the Financial Returns Your Organization Has Experienced with Your VMS to Date.

Unsure

We have not experienced savings from our use of a VMS service

We have experienced savings of between 1-3% in spending on the contract talent workforce due to our VMS






We have experienced savings greater than 25% in spending on the contract talent workforce due to our VMS

25% 50% 75%

59%

8%

1%

8%

11%

5%

4%

1%

1%

n=206

Per Figure 15(a), of our respondents who use VMS (73 in total) and who track cost savings (only 30) more than half (17) claim to be experiencing cost savings of 7 percent or greater and 4, or 13 percent, report savings of better than 15 percent. Among those respondents using VMS in combination with MSP (31), 18 are actively

measuring their savings. Though the sample is small, it is revealing that among this subset, 11, or 61 percent, report savings of 7 percent or better, and 27 percent report savings of more than 15 percent, both far better than the already impressive returns experienced by those using only VMS (Figure 15[b]).

In addition to impressive hard-dollar savings through VMS, our respondents reported substantial soft returns as well. The following quotes represent the general feedback we received from our survey:

“We’ve experienced an optimization of resource allocation and revenue recognition. We’ve also seen higher associate (contractor) satisfaction and productivity.”

“Increased efficiencies for hiring managers, finance teams and paperless timesheets/invoicing.”

“A streamlined process for obtaining talent. Robust reporting.”

“It’s easier for our managers to use than the old way of emails; managers can see a candidate’s history (who he/she worked for before in our company and what his/her performance is rated).”


22

Unsure

We have not experienced savings from our use of an MSP service

We have experienced savings of between 1-3% in spending on the contract talent workforce due to our MSP





We have experienced savings greater than 25% in spending on the contract talent workforce due to our MSP

Figure 15(b): Results for Those that Combine VMS with MSP

25% 50% 75%

42%

6%

3%

13%

19%

6%

6%

3%

n=31

Should Your MSP Provider also Own Your VMS Technology?

Many MSPs offer their own proprietary VMS technology. This can be convenient for organizations that prefer to limit the number of relationships they need to manage with suppliers and to force a single point of accountability for their CWM program. For smaller companies, a combined MSP/VMS can also save money. For larger organizations who want to standardize central CWM internationally, one supplier of MSP and VMS might make the process easier, less complex and less risky.

On the other hand, there are good reasons to insist that your VMS technology is not owned by your MSP. A case in point is Chimes, Inc. Two years ago, Chimes was among the very largest MSP/VMS providers in the industry, with dozens of blue chip clients depending on its services. In January 2008, Chimes filed for bankruptcy and went out of business entirely. While its competitors did a good job of ensuring that former Chimes customers were taken care of, the reaction among many organizations was to begin to separate their VMS provider from their MSP provider in order to better manage the risk. Most MSPs today hold relationships with numerous VMS providers and can assist in determining the best solution for each unique client.

Organizations should, first and foremost, choose the best VMS or MSP for their needs. They should not simply default to the VMS owned by their MSP.


23

Independent Contractor Engagement Specialists (ICES) and Portable Employers of Record (PERs)

10 Campbell, Anita. “No-Employee Small Business Numbers Grow,” Small Business Trends, August 11, 2008.11 A “1099” worker refers to a person who qualifies under IRS definitions as self-employed. A “W-2” worker is an employee of an

organization and taxes are withheld at source.

By the end of 2007, there were more than 21 million owner-operated “micro-businesses” registered in the United States. Many, if not most of these businesses are run by independent contractors who are normally the only members of their firms. This segment of the workforce is growing at a rate of at least one million per year according to the U.S. Census Bureau.10 As the workforce ages and skilled workers retire from their traditional careers, many are expected to become independent contractors.

At the other end of the workforce, a new generation of workers is more inclined than ever to choose the freedom and autonomy of being their own boss. Moreover, as discussed in the introduction to this paper, organizations are increasingly reluctant to expand fixed costs and payroll — hence the demand for independent contractors seems sure to rise. There is little doubt that the independent contractor component of the U.S. workforce will grow tremendously in coming years and will gain an increasing share of the broader contingent workforce, as well.

Independent contractors present a problem to most employers, however, as it is important that they be classified correctly for IRS purposes. If a company engages a contractor and misclassifies him or her as a 1099 contractor rather than as a W-2 employee,11 the organization is at risk of having to pay accrued payroll taxes, compensation for denied employee benefits, and perhaps fines or other penalties.

Independent Contractor Engagement Specialists (ICES) work with organizations to manage independent contractors — including high-rate, project-based SOW (Statement of

Work) consultants — by acting as an Agent or Employer of Record (EOR) for IRS purposes. ICES will assess the eligibility of a potential contractor for 1099 status. If they are found ineligible, ICES will hire the worker as their own W-2 employee, allowing him/her to work for the client on subcontract. For those that are eligible, ICES will act as the “Agent of Record,” simplifying the process for their clients.

For eligible contractors referred by the client, ICES providers save clients the entire cost of a staffing firm’s mark-up (typically 25 percent to 35 percent) minus their own fees of about 4 percent to 8 percent (sometimes passed on to the worker). For ineligible contractors, an ICES provider will typically charge between 16 percent and 30 percent and, as above, become the W-2 Employer of Record for the contractor.

Through partnerships, ICES may also help staff-ing companies in the expansion of their scope of services into the higher end of the contract talent workforce. Frequently, an MSP will intro-duce an ICES to its customers who may know independent contractors they want to engage, but prefer to do so through an ICES, who not only acts as the “W-2 Employer of Record” or “1099 Agent of Record” but who may also provide support services to the contractor so that they can focus on their client engagements rather than the administrative work involved in running their business.

As more of the contingent workforce is comprised of independent contractors, ICES providers are an increasingly important part of the CWM landscape. From the contractor’s perspective, however, ICES can be an imperfect solution. Because ICES accounts are


24

client-specific, the contractor, who may have several contracts with different organizations, might have to interact with multiple ICES providers. This leads to a number of problems for the contractor, including multiple, and often overlapping taxes and unemployment insurance deductions and a maze of paperwork, claims and potential redundancies with which to manage. In response, the combination ICES and Portable Employer of Record (PER) provider has arisen.

There are, as yet, only a handful of PER providers. Their potential impact is enormous. By focusing on both the contractor’s and the employer’s needs, PERs appeal to the fastest-growing segment of the U.S. workforce. It is important to remember that most independent contractors want to be independent and

autonomous. The Portable Employer of Record offers the same services as an ICES/EOR for employers but also allows a contractor to have one employer of record for all of their contracts. For this “freedom,” and for a range of other benefits PERs offer contractors, they are normally willing to pay the PER fee of between 4 percent and 8 percent of billings. This, in effect, relieves an employer of paying any fees at all.

In other words, if an employer wants to hire an independent contractor who they have sourced directly, they can refer the contractor to a PER. The PER will assess the candidate’s status as a 1099 contractor and then “hire” them as employer of record. A 4 percent to 8 percent fee will be deducted from the contractor’s billings each month.

How Combined ICES/PER Services Work at Siemens

Siemens, a 160-year-old company with 430,000 employees worldwide, takes CWM very seriously. Siemens uses a combination MSP, VMS and an ICES that is also a PER.

Siemens engages most of its contract workforce through its MSP, which in turn utilizes Siemens’s VMS to distribute requisitions among its tiers of staffing providers.

When Siemens knows who it wants to engage, however, it goes through its MSP directly to its ICES/PER. For high-level and highly skilled contractors (i.e., retired Siemens executives returning for special projects) the company is able to eliminate the relatively high fees charged by a staffing provider.

Siemens’ ICES/PER becomes its contractor’s employer of record. The ICES/PER covers the contractors insurances, tax administration, expense claims and other necessities for a fee of between 3 percent and 6 percent of the contractor’s pay (Siemens chooses to cover the fee on behalf of its contractors) rather than the 30 percent to 35 percent it typically pays when going through a staffing firm.

We minimize risk with our ICES, and it’s also cleaner. We know that the contractor has been evaluated properly; we know that access (i.e. passwords, etc.) is taken away when the contractor leaves. On-boarding is now consistent and we know taxes are being paid, etc. It saves time and money.”

Brian Kyle and Mary Hassler, Senior Siemens Executives


25

A relatively small percentage (16 percent) of our respondents use Independent Contractor Engagement Services (ICES) or similar services such as a PER (Figure 16). However, among the 27 users of ICES and/or PER services who track cost savings, almost half (48 percent) have experienced significant cost savings (greater than 15 percent) — a significantly higher percentage than for either MSP or VMS (Figure 16). Moreover, among the small subset of

organizations that use VMS, MSP and ICES (22), a full 55 percent report savings of better than 15 percent from their ICES/PER relationship.

Our respondents described other, non-financial returns from their ICES/PER programs, including the following:

“We can convert laid-off employees to independent contractors without rehiring. When we get referrals, we can avoid the cost of

Figure 16: Do You Use Independent Contractor Management or Similar Services?

Yes

No

Unsure

25% 50% 75%

15%

74%

11%

n=196

Figure 17: Realized ROI in ICES and PER

Unsure

We have not experienced savings from our use of the service technology

We have experienced savings of between 1–3% in spending on the contract talent workforce






We have experienced savings greater than 25% in spending on the contract talent workforce

25% 50% 75%

65%

6%

6%

6%

3%

3%

5%

1%

4%



26

0%

10%

20%

30%

40%

50%

60%

Self-sourced Through a third-party

staffing agency

Through MSP with VMS utilization

Through MSP without VMS

utilization

Through VMS without MSP

53%

27%

11% 6%

3%

Figure 18: Sourcing Independent Contractors

Source: Aberden Group, 2009

Figure 19: Independent Contractor Management

Independent Contractor Management Performance

Outsourced Self-sourced

Compliance to internal and federal policies regarding contract labor

63% 48%

Cost savings 8% 6%

Onboarding length 2.7 days 4.1 days

Time-to-fill an open requisition 8.6 days 11.5 days

Source: Aberden Group, 2009

12 “Contract Labor Management: Superior Workforce Strategies for a Demanding Environment,” by Aberdeen Group.

staffing agencies by putting them through our ICES directly. Our ICES helps us to engage our temporary and fluctuating needs for high-end contractors more effectively.”

“We see more consistency in rates and contract terms and there is much more control of risk and the quality of work from our affiliate workforce.”

According to a 2009 study by the Aberdeen Group, titled Contract Labor Management: Superior Workforce Strategies for a

Demanding Environment, the majority of the organizations who participated indicated that they use self-sourced independent contractors (Figure 18).12 Our findings show that only a small portion of those use ICES/PER services to manage their self-sourced independent contractors. The Aberdeen research demonstrates, however, that those who do outsource that management realize significant benefits in risk mitigation, cost savings and time to hire (Figure 19).


27

An Expert View: Jeff Nugent, CEO of Contingent Workforce Solutions

“In building the ROI for a centralized contract talent management program, decisions first have to be made on what the optimum program model is for your organization. Currently, there are hundreds of various providers with hundreds of varying solutions in the marketplace. In general, a successful program is made up of best-in-class people, processes and technology.

“As the industry has evolved, the main external components filling these rolls are MSP (Managed Services Provider), ICES (Independent Contractor Engagement Specialists) and VMS (Vendor Management Systems). Depending on the scale of your program and available budget, the combination of components (MSP, VMS, ICES) may vary. Organizations must truthfully ask themselves: ‘Do we have the availability and capability to manage our contingent workforce program internally?’ Although the first reaction is always ‘YES WE CAN,’ designing and managing a CWM program is very complicated with many moving parts and may often be an overwhelming task that is best left to industry experts.”

MSP

InternallyManaged

ExternallyManaged

VMS

ICEs

VMS

ICEs

MSP

InternallyManaged

ExternallyManaged

VMS

ICEs

VMS

ICEs

MSP

InternallyManaged

ExternallyManaged

VMS

ICEs

VMS

ICEs



28

Rockwell: A North American Strategy for CWM

Rockwell implemented a centralized CWM program with an MSP and a separate VMS in 2004. At that time, its North American demand for contingent and contract workers stood at $47 million per year and was supplied by more than 800 staffing providers. Hiring managers typically worked with whomever they wished to fill vacancies, and rates fluctuated.

According to Jacqueline Roberts, Recruitment & Relocation Manager for Rockwell Automation Canada, “Agreements were being made by managers directly with staffing suppliers; there was little control. There were lots of risks and on-boarding and off-boarding were not managed well, so we decided to go with the managed enterprise model, and it has proven to be one of our more successful outsourced relationships.”

In 2007, Rockwell extended its successful American program to Canada, which at the time was spending $14 million per year on contract/contingent talent. The program has been rolled out successfully — so successfully in fact, that Roberts pegs first-year hard dollar savings at $450,000 in Canada alone. In addition to the tangible savings, Roberts believes the program runs more efficiently now. Her initial concerns that problems would result from more work being placed on hiring managers (Roberts and her team used to screen and pre-interview all candidates, for example) have not materialized. Hiring managers now use the VMS to select requisitions, screen resumes, choose candidates, interview, and hire; but, according to Roberts, they are aided by the ease of use of their VMS and the support of their MSP partner. Rockwell’s MSP maintains two full-time program managers on site (one in the U.S. and one in Canada) and one in its own offices. The MSP provides assistance and training to new managers and those that need refreshers.

Rockwell is an interesting and increasingly common CWM example because its contractors tend to be skilled workers and professionals working alongside regular employees. Its MSP helped negotiate better and more consistent rates with Rockwell’s suppliers, but only marginally because Roberts and her team had already done much of that work prior to VMS/MSP implementation. Nevertheless, significant savings were still achieved in negotiating better terms for overtime work and even in such things as the supply of safety equipment for contractors (now provided by the staffing providers). Roberts still has concerns about “maverick” hiring managers (those who continue to work outside the program, directly with staffing suppliers) but with help from her MSP, the incidence of “maverick spend” is decreasing.

Finally, Rockwell uses ICES providers to payroll W-2 contractors that it sources directly (retirees, employee referrals, and so on) and it pays a competitive 16 percent mark-up for the service. It is now looking at the 1099 independent contractors it uses and sources itself. Roberts says Rockwell looks forward to more savings when the organization can negotiate better mark-ups for an ICES/PER to manage its growing population of independent contractors.


29

It is perhaps trite to say that you cannot hope to manage what you fail to measure. Nonetheless, organizations should measure the ROI in their programs, not only to justify the expense but also to understand where their investments are having the greatest payoffs. Our research and that of others have demonstrated conclusively that organizations spending more than roughly $8 million to $10 million on contingent and contract talent, and who currently operate in a decentralized manner, can realize significant

hard-dollar savings and important soft returns by moving to a centrally-managed CWM program.

To quantify those returns, however, organizations should attempt to benchmark their current processes and then measure the improvements as they first implement and then refine a centralized CWM program. Unfortunately, per Figure 20 below, the majority of organizations do not take the time to measure costs and returns in CWM.

Measuring and Managing ROI in Contract Talent Management Programs

“Some of the softer savings, I believe, are that we have improved contract compliance, and enhanced internal control. The reporting is night and day. I am able to get reports on who is on staff, what the average rates are, what supplier represents them, when they expire, etc. Just the reporting and better decision-making from it is possibly the greatest benefit that we have received. We’ve got more accurate vendor billings and a more productive vendor relationship management approach now … .”

Michael Peterson, Controller at the Electric Reliability Council of Texas

Figure 20: Does Your Organization Track the following:

Rate changes by category compared to prior periods

Cost savings through service supply chain disintermediation (i.e., removing layers and mark-ups)

Full-time benefited cost versus contract labor cost

Administrative cost savings from outsourcing business processes

I don’t know

25% 50% 75%

36%

31%

48%

56%

16%



30

Conclusions

“One of things we were looking for was better cost control. Our managers had established long-term relationships with staffing suppliers. But maybe they were the most aggressive providers, or the ones with the most personable sales people rather than the ones with the best talent at the lowest cost. What we found is that we had grown accustomed to paying a certain rate — say $125/hour for resource A — and that just became the going rate. With the introduction of VMS and MSP, our managers were challenged. We said: ‘Why don’t you post it out there at $100 and see what kind of resumes you get and what kind of talent is attracted?’ We found that, nearly across the board, not only were the suppliers willing to fund the model, but when they had to compete for every position (and at ERCOT we compete every position) our vendors sharpened their pencils. At this point, less than a year into the centralized program, nearly across the board and position by position, rate reductions have occurred as we compete either for extensions of jobs or new postings.”

Michael Peterson, Controller at the Electric Reliability Council of Texas

With changing business dynamics, looming demographic challenges and, perhaps most pressing, the requirement to save money, organizations are looking for ways to benefit from the skills, flexibility and variable cost structures offered by a larger contingent/contract workforce.

Those that pursue a workforce model that includes a higher percentage of contractors and contingent workers are likely to meet their objectives for cost savings and greater flexibility, but only if they manage the process carefully.

As a rule of thumb, organizations with 100 or more contractors can make a strong business case for Vendor Management Systems (VMS) technology to support centralized CWM, and those with $8 million dollars or more in contingent workforce annual spend can realize a compelling ROI by outsourcing CWM to a Managed Service Provider (MSP) in combination with VMS technology. Any organization, even those that source and hire just a few independent contractors each year, can make the case for using an Independent Contractor Engagement Specialist (ICES)/ Portable Employer of Record (PER).

Though one size never fits all, for most large organizations, it is safe to conclude that the following model is likely to yield the best ROI with the least risk:

• An enterprise-wide program, centrally managed by an MSP that is vendor-neutral and who has the size and clout to negotiate the best rates from your staffing providers, as well as introduce new providers that can help you acquire the highest quality talent at the lowest rates

• A vendor-neutral VMS managed by the MSP but not necessarily owned by the MSP

• A tiered vendor arrangement with a published master rate card: one in which requisitions are distributed to a vendor community that competes aggressively to fill each vacancy

• An MSP that manages staffing providers closely and reports on their performance, first coaching and then, if necessary, removing chronic underperformers and encouraging strong performers with additional opportunities to place contractors


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• Use of an ICES/PER, either brokered by an MSP or engaged directly. When an organization has sourced its own independent and compliant 1099 contractors, it should pay no more than 5 percent to its ICES/PER for validation, payroll and employer of record services. It may be convenient to put these “hires” through the MSP like all others, but the MSP will take an additional small percentage

in fees. The question is whether that fee (or a lower negotiated rate for Independent Contractors) is worth the convenience.

• Executive buy-in to mandate that all vendors must work through and be paid through the centrally managed process

The potential ROI in enterprise CWM is clear. Organizations are strongly encouraged to explore this potential.


32

VMS: A Vendor Management Solution (VMS) is an Internet-enabled, often Web-based application that acts as a mechanism for business to manage and procure staffing services — temporary, and, in some cases, permanent placement services — as well as outside contract or contingent labor (Wikipedia). Typical features of a VMS application include order distribution, consolidated billing and significant enhancements in reporting capability that outperforms manual systems and processes.

MSP (Managed Service Provider): Managed services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations (Wikipedia). In the contingent workforce world, MSPs take day-to-day management responsibility for some or all contingent workforce management. This means that among other things, they may help set and negotiate rates with staffing suppliers and monitor their performance. They may provide or help select and then manage the VMS. They may also work with their client’s hiring managers directly as consultants or advisors.

ICES: Independent Contractor Engagement Specialists Independent Contractor Engagement Specialists (ICES) work with organizations to manage independent contractors — including high-rate project-based SOW consultants — by acting as an Agent or Employer of Record (EOR) (for tax purposes, and so forth). ICES will assess the eligibility of a potential contractor for IRS-recognized independent contractor status. If they are found ineligible, ICES will hire the worker as their own regular employee, allowing him/her to work for the client on subcontract. For those that are eligible, ICES will act as the “Agent of Record” for that contractor, simplifying the process for their clients.

PER: The Portable Employer of Record offers the same services as an ICES for employers, but allows a contractor to have one employer of record for all of their contracts. A PER can be described as a traditional office — with the support of departments such as a contracts department, a finance group, a human resources department, a payroll team, benefits managers, collections agents, and others — that helps an independent contractor as he or she moves from client to client (Small Business Guru).

Appendix A: Glossary of Key Acronyms


33

Appendix B: Survey Demographics

73%

22%

5%

United States

Canada

Other

Origin of Respondents

n=206

Organization Size (by number of employees)

Fewer than 50 employees

50 to 100 employees

101 to 500 employees

501 to 2,500 employees

2,501 to 5,000 employees




Greater than 50,000 employees

25% 50% 75%

17%

12%

5%

23%

15%

8%

8%

7%

5%

n=194


34

Roles of Respondents

Executive Management

Division or Program Management

Operations

Technology

Sales or Marketing

Finance

Workforce Recruiting/Hiring Management

Other Human Resources

Other

25% 50% 75%

25%

6%

12%

2%

6%

3%

1%

15%

30%

n=198


35

The Human Capital Institute is a global think tank, educator, and professional association defining the agenda and setting the pace for the new business science of strategic talent management. With more than 160,000 members in over 40 countries, HCI offers a new association framework that cuts across the silos of recruitment, HR/OD, finance, sales and marketing, operations, manufacturing and IT. We provide key executives, line managers and talent management professionals with the newest education, most effective tools and best practices in talent strategy, acquisition, alignment, engagement, deployment, measurement and retention.

Through research and collaboration, HCI programs collect original, creative ideas from a field of the brightest thought leaders in talent management. Those ideas are then transformed into measurable, real-world strategies that help its members attract and retain high-performing people, build a diverse, inclusive workplace, and leverage individual and team performance throughout the enterprise.

The future belongs to leaders with innovative ideas and strategic knowledge. We invite you to learn, share and grow your career with HCI’s comprehensive resources, and to join our high-achieving, forward-looking membership community.

Allan Schweyer

Allan Schweyer is the author of Talent Management Systems (Wiley & Sons, 2004) and a contributor to HCI’s Talent Management Systems (Human Capital Institute Press, 2009). He is a respected analyst and speaker on the topic of transformational human capital management for individuals, organizations, regions and nations. In 2009 Schweyer was recognized as among the “100 Most Influential People in HR and Talent Management.”

Schweyer’s contributions include the development of award-winning workforce management and information systems for government, international organizations and the private sector. In 2000 and 2001, he worked as a management consultant to Reed Business Information in Boston while attending graduate school at Harvard University. Allan has served as an executive director at HCI, and as a senior researcher, analyst and consultant with HR.com, servicing large private and public sector clients worldwide. Allan’s articles and white papers appear in dozens of popular media and industry-specific publications worldwide.

Appendix C: About the Author

About HCI

Documents

The ROI in Enterprise Contract Talent Management